Stocks to trade lower amid earnings tidal wave

Heaviest week of earnings season will see 172 S&P 500 companies reporting

By

NickGodt

NEW YORK (MarketWatch) -- U.S. stocks will fall further next week, the busiest of the second-quarter earnings season, as investors wrestle with a rush of lukewarm corporate results and growing evidence that problems in the subprime loan sector are deepening, analysts said.

Investors, who will digest financial results from 172 companies in the Standard & Poor's 500 index, will also be on the lookout for any development in credit markets, where a broad sell-off on Friday spilled over to stocks, capping a week that also revealed the impact of the meltdown in the subprime mortgage market on financial shares.

"How we leave Friday is how we will enter the week," said Paul Nolte, director of investments at Hinsdale Associates.

On Friday, the Dow Jones Industrial Average
DJIA, +0.08%
lost 149 points to 13,851, as enthusiasm wilted under disappointing earnings from Google Inc.
GOOG, +0.48%
and Caterpillar Inc.
CAT, -2.31%
as well as nervousness about credit markets.

The Dow, which closed above 14,000 for the first time on Thursday, finished the week 0.4% lower. See Market Snapshot.

Away from the Dow, investors will look out for key technology earnings from Texas Instruments Inc.
TXN, -0.10%
on Monday, Amazon.com Inc.
AMZN, -0.89%
on Tuesday, and Apple Inc.
AAPL, -0.32%
on Wednesday.

Lukewarm earnings so far

Following a heavy week that saw 125 companies of the S&P 500 reporting, earnings growth for the second quarter is so far pegged at 5.2%, an improvement from 4.2% last week, according to Thomson Financial.

But the trends of the earnings season aren't as rosy as some of the headlines. Only 59% of the companies reporting have topped expectations, compared with an average of 68% over the past eight quarters, according to Thomson.

In addition, profits have topped expectations by a 2.7% margin, compared with an average of 4.3% over the past eight quarters and a 3.4% long-term average.

"If you go back to the first quarter, earnings beat the consensus by a wide margin," said Dean Junkans, chief investment officer for Wells Fargo Private Bank. "This time, positive surprises haven't been widespread and that bears watching."

Forecasts for the third quarter have also waned slightly, with earnings growth now seen at 6%, down from 6.2% last week.

Financials weigh down market

Although overall results at major banks weren't alarming for the second quarter, analysts are concerned that the impact of the meltdown in the subprime mortgage market will be felt further in the third quarter.

"The financial sector, the biggest sector in the market, has taken a hit and has been really correcting," said Hinsdale's Nolte.

While most financial firms reported earnings last week, a spate of downgrades and lowered estimates is likely next week, he said.

Comments from the likes of JP Morgan Chase & Co.
JPM, -0.72%
and Citibank Inc.
C, -0.34%
revealed growing concerns not only about subprime but credit markets in general.

Concerns are growing about risky loans everywhere, including those that have helped fuel a historic boom in private-equity buyouts, a major source of support for the stock market over the past few years.

On Friday, Citigroup joined the ranks of banks warning that it could be stuck holding leveraged loans for corporate buyouts.

The bank said it was unable to sell debt to investors on four deals in the second quarter, leaving it holding so-called bridge loans on its balance sheet and taking a hit on revenues.

"If you take a look at the economy, it has been slowing, and we are seeing weakness in earnings," Nolte said. "But you look at the strong performance of the equity markets, you think gosh, everything is great."

"A lot of those gains have been from the private equity buy-outs and hedge funds," Nolte said. "If those sources starts to dry up, then that fuel ends and we'll have to trade on economic data, which may allow for the market to correct accordingly."

Energy to the rescue

One bright light for next week could come from the energy sector, where 16 of the S&P 500 energy companies will report earnings, including Exxon Mobil, ConocoPhilips
COP, +0.20%
and Chevron Corp.
CVX, -0.35%

Rising energy prices have helped lift earnings expectations for the sector's major companies.

"Most of those higher revisions are already baked into the numbers," said John Butters, analyst at Thomson Financial. "But if they revise higher a by wide margin, then we can see a big improvement."

Weak dollar, global growth

Investors will also continue to monitor the weakness in the dollar, which has reached historic lows against the euro and the yen over the past few weeks.

The weak dollar has been playing in favor of multinational U.S.-listed companies, which benefit from the currency translation of overseas profits .

"Global growth is still a big beneficiary for industrials, basic materials, and technology," said Dean Junkans, chief investment officer for Wells Fargo Private Bank. "Those that have exposure to this very strong global growth will still have strong earnings."

On the data front, among key economic data next week will be June existing home sales on Tuesday, durable goods orders on Wednesday and the second-quarter GDP on Friday.

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